East Coast looks to lure oil money as Alberta discounts bite

CALGARY — The deteriorating price environment for Alberta’s oil sands stands to spur development on Canada’s East Coast, where new seismic work has uncovered three “very large” but highly prospective oil fields in the Labrador Sea.

The subsea structures, revealed after a two-year seismic program mapped an area equivalent in size to the Gulf of Mexico, are being shopped around to international oil companies as a promising new deepwater exploration frontier by Nalcor Energy, Newfoundland and Labrador’s provincially owned energy company.

The promotional tour comes as Exxon Mobil Corp. moves forward with its $14-billion Hebron project, which is located 350 kilometres southeast of St. John’s and could yield 700 million barrels of oil over its lifetime.

Newfoundland and Labrador produced more than 267,000 barrels per day of undersea crude in 2011, all of it linked to world oil prices. That alone could lure investment away from landlocked Alberta, where oil sands producers face the prospect of dwindling returns until at least 2017 as pipelines back up amid a supply glut.

“Whether we ever will actually get pipelines built would absolutely force you to make strategic decisions about whether you’re going to put your capital to work elsewhere,” said Barry Munro, Canadian oil and gas leader with advisory firm Ernst & Young. “Hebron would be a beneficiary of that.”

Exxon’s $14-billion investment in the Hebron project rivals the $23-billion spent on oil sands projects in 2012. It follows the $1.05-billion purchase of four exploration blocks made last year by BP PLC offshore Nova Scotia, in an area covering roughly 14,000 square kilometres characterized by Mike Daly, BP’s executive vice-president of exploration, as “one of the most promising new deepwater areas to be licensed in recent years.”

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Shell Canada Ltd. also picked up exploration rights on four parcels offshore Nova Scotia for $32-million.

“The beauty of the offshore is that we actually participate in the global market by tanker, which means that we get Brent pricing,” Nalcor chief executive Ed Martin said in a telephone interview from St. John’s.

Mr. Martin declined to say which companies had viewed the new seismic data, citing the competitive nature of the discussions. Those super majors that have viewed the data have shown a “keen interest” in the structures, which are located 2,000 to 3,000 metres under water in an oil-prone band of rock understood to be wider than originally thought, he said.

“We’ve actually discovered three new, very large basins and we’ve also proven that a fourth basin that already existed — the aerial extent is much greater,” he said. “So we’ve effectively doubled the size of our prospectivity in the Labrador Sea, and that’s a very large area.”

The scale of work planned for Hebron is equally large. At its peak, the offshore venture could employ up to 3,500 people, according to Exxon.

Much of the fabrication work will take place in Bull Arm, a 2,500-hectare site designed and built in the 1990s for the Hibernia project located roughly 150 kilometres west of St. John’s. Nalcor, which owns a 4.9% stake in Hebron, estimates more than $9-billion worth of construction and fabrication work will pass through the sprawling yard by the time Exxon produces first oil.

In Alberta, Exxon-controlled Imperial Oil Ltd. is awaiting first oil at its $12.9-billion Kearl oil sands mine. Suncor Energy Inc., which holds a 23% working interest in Hebron, also maintains a 27% interest in the White Rose oil field being developed on the East Coast by Husky Energy Inc. Calgary-based Suncor, Canada’s largest oil company, also holds a 20% working interest in Hibernia, where production fell 16.4% between January and November in 2012 from a year earlier, according to the Newfoundland government.

The Hebron project “really helps diversify Canadian production for these companies, and it does reduce their price risk exposure to the Western Canadian discount,” said Brian Youngberg, an analyst at Edward Jones & Co. who follows Exxon.

“With the discount and the potential for that to last a while, it may make sense for them to diversify their Canadian portfolios as quickly as possible, and the logical way to do that is [to] look east.”

A rise in production from Canada’s East Coast could potentially complicate plans to move Alberta oil east. Trans­Canada Corp. has contemplated converting a portion of its cross-country natural gas mainline to oil service.

The conversion, endorsed by Alberta premier Alison Redford and her New Brunswick counterpart, David Alward, could move up to one million barrels of oil sands-derived crude east for refining in Quebec and, potentially, Irving Oil Ltd.’s refinery in Saint John, N.B., but not until 2017 at the earliest, TransCanada said this week.

Exxon expects Hebron will be pumping 150,000 barrels per day from the ocean floor by then. “If you’ve got oil producing out of the offshore eastern Canada, what’s going to be the demand for that product that we’re bringing all the way from Western Canada?” said Rafi Tahmazian, portfolio manager at Canoe Financial LP in Calgary.